Higher savings rates have delivered a welcome boost to Australian households, but many savers may be overlooking an important detail that could affect their finances at tax time.
With banks offering some of the strongest deposit rates seen in more than a decade, Australians are earning significantly more interest on their savings than they did just a few years ago. The catch is that this additional income does not escape the attention of the Australian Taxation Office (ATO).
Research from Money.com.au found the average Australian earned around $1,650 in savings interest over the past 12 months. For someone paying a marginal tax rate of 32 per cent, that could translate into an additional tax liability of approximately $528.
While the figure may come as a surprise to some savers, tax professionals say it reflects a long-standing rule that is becoming more noticeable because higher interest rates are generating larger returns.
Why more Australians are noticing tax on savings income
Interest earned from savings accounts, term deposits and other bank deposits is generally treated as assessable income. In practical terms, that means it is added to wages, investment income and other earnings when calculating taxable income for the financial year.
One of the biggest misconceptions is that tax only applies when money is withdrawn from an account. In reality, interest is generally assessable when it is credited by the financial institution, regardless of whether it is spent or left in the account to compound.
Banks and other financial institutions also report interest earnings directly to the ATO. In many cases, the information is automatically pre-filled in tax returns, reducing the likelihood that taxpayers overlook the income.
Mark Chapman, director of tax communications at H&R Block, noted that from the ATO’s perspective, bank interest is treated no differently from salary, rental income or dividends.
Australia’s record savings pile is amplifying the impact
The warning arrives at a time when Australians are holding more money in bank accounts than ever before.
Latest APRA data cited in the report showed household deposits increased by $14.5 billion during April alone. Total household deposits rose by $131.2 billion over the past year, an increase of 8 per cent, reaching a record $1.74 trillion.
Those figures highlight why tax on savings interest is becoming a bigger issue. Higher deposit balances combined with stronger interest rates mean many households are generating far more interest income than they were during the low-rate period.
Advertised rates do not tell the full story
Many Australians compare savings accounts based on headline rates alone. However, the return that ultimately matters is the amount left after tax.
Money.com.au finance expert Sean Callery noted that a savings account offering 5 per cent interest may effectively deliver closer to 3.4 per cent after tax for an average income earner.
Some banks continue to offer highly competitive rates. Westpac, for example, currently advertises a savings rate of 5.75 per cent, although eligibility is restricted to customers aged between 18 and 40.
Which Australians are earning the most interest?
Money.com.au’s research found Baby Boomers earned the highest average amount of savings interest at $1,930 over the past year.
Millennials followed with average interest earnings of $1,650, while Gen Z savers earned around $1,520 and Gen X savers earned approximately $1,370.
The figures suggest the issue extends well beyond retirees. First-home buyers, households building emergency funds and retirees relying on savings income are among the groups most likely to feel the impact.
Australians reviewing their finances before lodging a return may also benefit from understanding when to lodge an Australian tax return, particularly if they expect higher taxable income from savings interest this year.
Why offset accounts are attracting attention
For mortgage holders, there may be another way to put spare cash to work.
Unlike a traditional savings account, money held in an offset account reduces the amount of a home loan balance on which interest is calculated. Instead of generating taxable interest income, the savings come through lower mortgage interest costs.
Because the benefit comes from reducing borrowing expenses rather than earning income, it is generally not treated as taxable income in the same way as savings account interest.
As a result, some homeowners may find an offset account delivers a stronger effective outcome than a savings account offering a similar headline rate.
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The best option depends on individual circumstances, including mortgage rates, savings balances, tax brackets and financial goals. However, the growing gap between pre-tax and after-tax savings returns means more Australians are likely to compare both strategies.
Readers can check the official rules on declaring bank interest through the Australian Taxation Office’s guidance on bank accounts and income bonds.
The broader lesson from this year’s tax warning is straightforward: higher savings rates may increase earnings, but they can also increase tax obligations. For Australians benefiting from stronger returns on their cash, understanding the after-tax impact has become just as important as chasing the highest advertised rate.
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